Imagine: a credit card company that not only pays you, but provides a raise on top of that. This is the case with the world's top payments processor Visa (NYSE:V), which has just declared a seemingly mighty dividend hike of 20% (to a quarterly rate of $0.48 per share) in advance of its Q4 and fiscal 2014 results release next week.
Twenty percent is a pretty big number, and it theoretically makes the company's stock that much more tempting. But will the company be able to maintain it for very long?
Living on credit
The world loves paying with plastic, and as the number one name in the credit card sphere Visa has benefited from the trend. In Q3, it characteristically delivered an improved set of results, with revenues advancing 5% on a year-over-year basis to $3.16 billion. Net profit, meanwhile, grew by 11% to $1.36 billion over the same stretch of time.
Such strong profitability allows the company to carry plenty of cash and equivalents on its balance sheet, to the tune of just over $2 billion at the end of the most recent quarter.
That's more than enough money under the mattress to pay out the company's dividend, and then some. Visa spent $758 million on dividends during the quarter, far less than half of that $2 billion. Even an increase of 20% isn't going to tip that number into risky territory.
So the new dividend is more than sustainable. But it raises a question -- if Visa's leaving itself a more than comfortable margin between what it earns and what it pays, is it worth owning purely as a dividend stock?
Not particularly. In terms of dividend yield, the new quarterly amount of $0.48 per share clocks in at a miserly 0.9%. Visa's stock is expensive, after all, currently trading in the vicinity of $215 per share or so.
Unfortunately for those that like to invest in plastic rather than simply spend with it, a tiny dividend yield is rather standard in the industry. The yang to Visa's yin, fellow payment processor MasterCard, is even lower at 0.6%. Card purveyors that also act as issuers (rather than just payment processors) are slightly more generous, but still nothing to sing about -- American Express yields 1.2% just now, while Discover Financial Services ekes out 1.5%.
Contrast that with the average dividend yield of the S&P 500, which currently hovers just under 2%. Or the payouts from other famous names in the financial industry; the dividend yields of banking majors Wells Fargo and JPMorgan Chase, for example, are both 2.7% at the moment.
A keeper, but not a yielder
In the wake of its announcement of the enhanced dividend, Visa's stock is trading up by several dollars. Given its excellent fundamentals, it certainly deserves the investor love it's receiving. The company is solid, well managed, and has a strong and established position on the market. What it doesn't have is a generous dividend, and potential investors interested in the stock -- not to mention income investors on the hunt for high yield -- shouldn't buy it only on that basis.
Eric Volkman has no position in any stocks mentioned. The Motley Fool recommends American Express, MasterCard, Visa, and Wells Fargo. The Motley Fool owns shares of Discover Financial Services, JPMorgan Chase, MasterCard, Visa, and Wells Fargo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.